Caspian Oil: How Soon and at What Cost?

On March 13, 2001, Ambassador Elizabeth Jones, Senior Advisor for Caspian Basin Energy Diplomacy, Edward C. Chow, an international oil consultant, and Carnegie Senior Associate Martha Brill Olcott discussed the prospects for the development of the rich oil resources in the Caspian Sea basin. Andrew Kuchins, Director of the Endowment's Russian and Eurasian Program, chaired the meeting.

Introduction
The Caspian oil reserves offer vast economic opportunities for the United States, for the Caspian states, and for international oil companies, Andrew Kuchins explained in his opening remarks. How these actors define their interests-both economic and political-will affect how soon and at what cost oil will be transported out of the Caspian basin for sale on the world energy market.

Benefits for All
Addressing the issue of how soon Caspian oil will be sold on world markets, Ambassador Jones argued that "transporting the oil is as important as oil production." Developing a transportation network that cannot be controlled exclusively by Moscow is critical for the independence of the newly independent states in the region. The Caspian Pipeline Consortium's completion of its pipeline running from western Kazakhstan to Novorossiisk, Russia at the end of last year represented a "major achievement for the countries and companies involved." Working together, Caspian Pipeline Consortium (CPC) members were able to overcome tax issues, legal issues, and right-of-way issues that complicated the pipeline's construction.

However, the United States should work to promote alternative transportation routes that will reduce the Caspian states' dependence on shipping oil and gas through Russia. The United States has promoted the construction of a 1,730 km pipeline running from Baku, Azerbaijan to Ceyhan, Turkey as one alternative. Ambassador Jones argued that this independent transportation system would offer significant benefits for the United States and the Caspian states. First, a decrease in the volume of oil shipments running through the Bosporus would reduce the negative environmental impact of this route and allow more oil to get out to the market. Second, the Baku-Ceyhan route runs through Georgia, allowing the nation to benefit from being along the transit route and ensuring that Moscow will not be able to turn on and off oil and gas shipments as it sees fit.

While a consequence of promoting alternative pipeline routes may be the aggravation of Russia, the interests of the Caspian states and the prevention of Russian oil monopolization are more important to US interests in the region. The United States should make it clear to Russia that the actors in the Caspian basin are not involved in a zero-sum game. Also, Jones argued that the involvement of the United States and international oil companies in the region provides access for international organizations working to promote transparent business interactions and rule of law. "I firmly believe that participation is better than ignoring the region," said Jones. She stated that the United States should work to "help create the political and economic conditions in these newly independent states, under which commercial arrangements can be made."

Happiness is Multiple Pipelines
Next, Edward C. Chow gave his personal perspective on Caspian oil, based on his experience working in the region. Referring to a bumper sticker he saw in Ambassador Jones' office several years ago that read "Happiness is Multiple Pipelines," Chow argued that in the long run, two or three export routes will be needed from the Caspian, although it is unlikely that the United States can do much to speed pipeline projects along if international oil companies are reluctant to construct them. What the United States should do, said Chow, is invite industry competition in the region to ensure fair and equal access for all shippers of gas and oil.

Chow commented on the gap between how the US government sees the Caspian, and how the region is viewed by international oil companies. While the US State Department has cited huge figures for Caspian oil reserves, oil companies are more interested in oil that is easily retrievable and can be transported for sale on world energy markets. Oil companies are hesitant to begin work on extra pipelines, since their construction is a costly, long-term endeavor; Chow noted that it took over a decade to construct a pipeline for Alaskan oil discoveries, and this project involved only the United States and Canada. "The industry won't commit money before it has to," said Chow, explaining that oil companies require proper information and long-term security to begin such vast undertakings. While Caspian oil will have a significant impact on the politics in the region and on the international energy market, the reserves of retrievable oil there are much less than those in the Persian Gulf.

As it becomes necessary, argued Chow, oil companies will construct alternate transport routes for Caspian oil. For now, the US government should encourage transparency, competition, and fair business practices to create a climate in which oil companies, the newly independent states, and energy consumers can benefit.

Growing Separation of US Business Interests from Security Concerns
Carnegie Senior Associate Martha Brill Olcott said that while security concerns will dominate US foreign policy in the new administration, the Caspian region is not vital for US security. Instead, US business interests will begin to be separated from security concerns in the region, particularly once pipeline routes are set. Once routes and fees for transit are set, the United States will move to "maintenance mode," diminishing its involvement unless there is a major eruption in the region.

One potential cause of such an eruption is regime succession in the Caspian basin. Olcott argued that renationalization of oil resources is unlikely as long as succession does not occur while transit routes are being set. Another, less harmful result of succession is the increased participation of Russian oil firms in the region. Olcott predicted that if this happens, Western assets should be safe. While Russia may try to extract rent on oil transport, the "goal of Russian policy is not to make the oil industry unprofitable," said Olcott.

Olcott forecasted a more nuanced Russian strategy for influence in the region, taking into account the democratic will of neighboring states. According to her, we can expect to see Russia search for low cost, high yield economic advantages while maintaining a security presence in the region, since financial limitations prevent Moscow from adopting a grander strategy. Russia and the United States are beginning to share strategic concerns in Central Asia, such as drug trafficking, terrorism, and arms proliferation. Russia's approach to these issues differs from that of the United States, but given that Russia's interests in the region are much more acute, Russian actions will be more influential than US involvement in the region.

Speaking of the prospects for economic and democratic reform in the Caspian basin, Olcott observed that these issues will likely be of diminishing importance for the Bush administration. Once agreements are reached on Caspian oil, the United States will lose leverage in the region. The regimes that have developed in the region are corrupt but sophisticated, and have learned to use sector-specific transparency to appease western concerns, while limiting more profound political and economic transparency.

Discussion Period
Responding to a question on the possibly diminished importance of Russia and the former Soviet Union for the new US administration, Jones said that "it is now too early to speak of diminished interest in the region." Olcott commented that while in the early 1990s the United States possessed sufficient influence to affect developments in the region, at this stage, disengagement of US resources will not have a great impact.

Asked about the prospects for greater Russian and Iranian cooperation in the Caspian basin based on the recent visit of President Khatami to Moscow, Olcott remarked that differences between the two nations remain. The arms deals reached between Russia and Iran represent the work of military and industrial special interest groups in Moscow using Russian foreign policy to advance their own agenda, and will not necessarily lead to agreement on Caspian oil.

Chow fielded a question on the extent to which international oil companies and Caspian states were involved in corrupt practices. The questioner noted that while international oil companies might seek a secure legal framework for business deals, these companies have seldom been hesitant in the past to do business in corrupt areas. Chow responded that corruption was not rare in oil agreements, due to the large amounts of capital involved and the concentrated nature of the industry. "The best way to eliminate corruption is to allow the maximum level of competition," Chow concluded.

Summary prepared by Erik Scott, Junior Fellow with the Russian and Eurasian Program.